Media Articles

New Operational Ability requirements for Key Individuals and Representatives

Posted on 1 March 2018   

It has always been a regulatory requirement for a Key Individual to maintain the operational ability of an FSP, and this includes having oversight of the financial services provided by the Representatives of the FSP. In this article we focus on the additional operational ability requirements imposed on a Key Individual and a Representative in terms of the new Fit and Proper requirements, which come into effect on 1 April 2018.

Operational ability refers to the functional skill, capability and capacity of a person or organisation to perform certain duties, tasks and obligations. As such, an FSP must ensure that where it appoints a Representative, that person must possess the operational ability to effectively function as a Representative of the FSP or perform the activities for which that person was appointed.

There are new Fit and Proper requirements that apply to Representatives, including:

  • The Representative is not insolvent or under liquidation. A Representative may also not be the subject of any pending proceedings (e.g. court action) which may lead to insolvency or liquidation, and
  • Where the FSP appoints a Representative, such appointment must not compromise fair treatment or satisfactory service to clients or prevent the FSP from acting in the best interests of its clients, or materially increase any risk to the FSP.

It is a requirement that an FSP implements a contingency plan so that if the Representative’s appointment is terminated, they can ensure continuity of the FSP’s business and services to its clients.

The new Fit and Proper Requirements also impose the responsibility on an FSP to ensure that the remuneration or fees paid to its Representatives are reasonable and are not structured in a manner that may increase the risk of unfair treatment of clients. A Representative is not allowed to outsource or sub-delegate any of the activities he or she is appointed to perform on behalf of the FSP.

There are new rules iro Juristic Representatives – so, if an FSP appoints a Juristic Representative, it must have sufficient operational ability and financial resources to perform the activities and must have at least one Key Individual responsible for managing and overseeing all classes of the business.

Key Individuals may be appointed to more than one FSP or Juristic Representative, but on condition that they can show the Registrar that they have the required operational ability to effectively and adequately manage or oversee the financial services and related activities of all the FSPs. This means that an FSP needs to assess its Key Individuals’ operational ability on a regular basis to ensure that they can adequately and effectively perform their functions, considering the nature, scale, range and complexity of the FSP’s activities. The responsibility to assess and prove that they have the operational ability to carry out their responsibilities, including cases where the Key Individual acts for multiple FSPs, is on both the Key Individual and the FSPs.

The Determination of Fit and Proper requirements for FSPs creates a very specific duty on all FSPs to establish and maintain the specified requirements to qualify as being ‘fit and proper’.

Key Individuals should ensure that they fully understand what it means to manage and oversee an FSP and any person who is looking to take on the responsibility of a Key Individual should do so with clear knowledge of the obligations and duties which they will have to carry out as it will require commitment and time.

Masthead offers a KI Responsibility seminar that provides you with insight to ensure that Key Individuals carry out their duties of managing and overseeing the activities of an FSP with the necessary due care, skill and diligence.

Visit the Masthead Learning Centre for more information on upcoming seminars and other events in your region.

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A national supplier of risk management services to independent financial advisors and other licensed financial service providers (FSPs). Established in 2004, we help our clients overcome their risk management challenges so they can grow and thrive in an increasingly regulated industry. Providing professional guidance and practical support, our team of specialists is passionately committed to delivering tangible solutions.

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